After a couple of years of flattish sales, Blue Nile is back on a strong growth path. Revenues for the largest online seller of jewelry in the world were up nearly 19 percent in the first quarter ended March 2010.

 

This is the second sequential quarter that sales have shown double digit growth, after languishing for nearly two years. Sales by segment in the first quarter were as follows:

 

·        Total revenues rose by 18.7 percent.

 

·        Total U.S. sales rose by 13.6 percent. Jewelry priced over $25,000 retail and non-bridal fashion jewelry were the strongest categories.

 

·        Total international sales rose by 71.4 percent, and represented 13 percent of total corporate revenues.

 

·        Sales in the first quarter of 2010 were at a record level. In short, sales have recovered, and are now greater than pre-recession levels at the end of the first calendar quarter.

 

The following table summarizes Blue Nile’s key financial results for the first quarter ended March 2010.

 

 

First Quarter Highlights

The following are highlights of Blue Nile’s first quarter financial results.

 

·        Website traffic was up, conversions (browsers-to-buyers) rose, and the number of orders increased. The average ticket also rose; however, the company no longer discloses its average ticket. We estimate that it was in the range of $1,600. This compares to the average ticket for a chain jeweler like Zale or Kay which is in the $300-350 range, while the average ticket for an AGS store – a better-end jeweler – is about $1,100.

 

·        Orders from existing customers were strong. About 23 percent of total first quarter sales came from customers who have previously purchased from Blue Nile.

 

·        Management noted that diamond engagement ring sales were strong; we believe that the average ticket has begun to rise for this category, and may exceed $6,000. This is about double the industry average for a diamond engagement ring.

 

·        Other non-engagement diamond categories which showed growth included diamond bands, rings, bracelets, earrings and necklaces.

 

·        Sales above $25,000 retail showed the strongest growth of any price point range.

 

·        Among non-diamond fashion jewelry, the following segments showed solid growth in the quarter:

 

o       Pearls

o       Silver

o       Colored gemstone jewelry

o       Watches

 

·        The company’s gross margin rose modestly to 21.3 percent of sales from 21.2 percent last year. A higher mix of non-engagement jewelry – an inherently higher margin category – helped boost Blue Nile’s margin. However, a greater mix of high-ticket sales – which carry a lower-than-average margin – hurt its gross margin. The typical specialty jeweler in the U.S. generates a gross margin of about 50 percent. Because of Blue Nile’s low operating costs and use of “memo” goods, the company can operate profitably at a much lower margin than other jewelers. Blue Nile’s prices are consistently lower than most store-based jewelers’ retail prices before discounts.

 

·        Blue Nile’s annual inventory turn was 13.6 times, based on the trailing twelve months’ results. This is far above the jewelry industry average of about one turn annually.

 

·        The company no longer provides a detailed outlook on a quarterly basis, but its annual outlook calls for the following:

 

o       Net sales for the year should rise by 15 percent over 2009 levels of $302 million. This implies sales near $350 million, or the equivalent of over 300 independent specialty jewelry stores which average just over $1.1 million each.  

Earnings per share should rise by at least 20 percent over 2009 levels. Because the number of shares has been relatively flat (and we assume no material stock buy-back activity this year), this means that after-tax profits should also rise by 20 percent or so. Clearly, Blue Nile expects its gross margin to rise and/or its expense ratio to decline.